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Cladding manufacturers and leaky schools - sufficiently close to care?

The Minister of Education and others, including four school boards of trustees, issued proceedings against Carter Holt alleging its cladding product, called shadowclad and installed in various school buildings throughout New Zealand, was defective and allowed water to enter.

Five causes of action were alleged: negligence, breach of the Consumer Guarantees Act 1993 (CGA), negligent misstatement, negligent failure to warn, and breach of the Fair Trading Act 1986 (which ultimately did not make it into the strike out submissions).

In response, Carter Holt filed a strike out application in relation to the first four causes of action arguing they could not succeed and that the claims in negligence were subject to the 10 year long stop limitation in s 393 of the Building Act 2004 (“BA 2004”).

Asher J determined the strike out application, finding:

The claims in negligence were finely balanced, but it could not be concluded that no duty of care would be found to exist.

The CGA claim involved issues of fact that could not be resolved in a strike out application. Given Carter Holt is a manufacturer, the guarantees under the CGA could apply with the exception of the guarantee under s 8 which only applied to suppliers.

The 10 year long stop did not apply to the duty of care as the supply of cladding is not building work, and did not relate to a specific building or buildings.

Discussion

Negligence/Duty of care

The plaintiffs claimed Carter Holt owed them a duty of care in designing, manufacturing and supplying the cladding sheets and cladding systems to be used in schools. Carter Holt denied it owed the plaintiffs such a duty.

Asher J found a number of factors which militated against finding a duty of care. There are no specific duties placed on the suppliers of components under the BA 2004, and the situation can be distinguished from the position in Spencer on Byron[1] where the Supreme Court placed weight on the specific duties imposed by the BA 2004 on territorial authorities.

Although there were no direct dealings between the plaintiffs and Carter Holt, the supply of shadowclad arose from commercial contracts between parties of relatively equal negotiating power, who may have been able to control their relationships by contract. They may have been able to make contractual provision for where the risk would fall if the cladding leaked. On the other hand, that argument was not as strong as in cases where there were direct dealings between the parties.

In favour of finding a duty of care was foreseeability of loss, which was clearly established in this case, and the fact that the damage resulted from loss was not solely economic. There will be damage to property from water ingress as well as a risk to the health of the buildings’ occupants. The risks to health in particular pointed in favour of recognising a duty. There was also the fact that, on some occasions at least, the involvement of school boards in the contractual situation distinguished the present case from a truly commercial situation. It could be argued that there is a heightened degree of vulnerability and reliance on the part of such boards, and therefore, presumably, a duty.

Asher J did not accept that the imposition of a duty of care would necessarily provide the plaintiffs with a free warranty as to quality as was suggested by Carter Holt. To succeed on a claim of negligence actual carelessness must be shown, a requirement that does not exist in the context of a contractual guarantee. Manufacturers make profits from products they produce and supply to the suppliers. It could be said that requiring the suppliers to insure against the risk of failure causing leaky building claims would be for the benefit of the public.

Whether there is a duty of care was finely balanced and Asher J did not think the fact that the relevant supplies arose in a largely commercial context and could have been covered by contract, was conclusive in finding against a duty.

Asher J concluded that it was arguable that there was the necessary proximity between Carter Holt and the plaintiffs. While he recognised the force in the policy argument of commercial certainty, he did not consider that this sufficiently militated against the possibility that a duty may be found.

Consumer Guarantees Act

The plaintiffs argued that Carter Holt in supplying cladding sheets and cladding systems was a supplier supplying goods to a consumer and that, as a result, the CGA applied.

Carter Holt argued the CGA did not apply because, although it applied to goods attached to or incorporated in real property, its application was expressly excluded in relation to buildings. Carter Holt argued that the claim should properly be considered on the basis that the plaintiffs purchased finished school buildings from their contractors. They did not purchase cladding sheets as goods directly from Carter Holt or indirectly through their contractors. Therefore, the plaintiffs were not consumers of goods and the statutory guarantees in the CGA did not apply.

Asher J found that rather than being a supplier of cladding, Carter Holt was a manufacturer of goods and it was arguable that consumers who acquired those goods, with or without a direct contract with the manufacturer, could be the beneficiaries of the guarantees in the CGA. The fact that the goods were ultimately incorporated into buildings did not necessarily mean that the CGA could not apply. Whether the CGA applied would depend on an analysis of the facts of the various transactions.

Were the proceedings time barred?

Carter Holt submitted the 10 year long stop imposed under s 91 of Building Act 1991 Act or s 393 of BA 2004 applied. The structure of the long stop provision is the same in both the 1991 and 2004 Acts. The prerequisites to the long stop applying are:

civil proceedings;

relating to building work; and

ten years or more elapsing from the act or omission on which the proceedings are based.

The focus, Carter Holt argued, was on the meaning of the phrase “relating to building work”. Carter Holt argued that, while the manufacture and supply of the cladding sheets did not amount to “building work”, the manufacture and supply was “related” to building work and so the long stop applied.

The plaintiffs argued that there was a distinction in the BA 2004 between the manufacture and supply of building materials and building work, and that the long stop applied only to work done in relation to a particular building and not to the production of building materials.

Asher J found the legislative scheme distinguished between building work and building elements. Cladding sheets were building elements for the purposes of the Building Code and there were specific timeframes for their performance which provided for either 15 or 50 years.

Asher J emphasized the focus in the 1991 and 2004 Acts was on work actually done to or on a building. The definition of “building work” confined work to that connected with the four listed activities of construction, alteration, demolition or removal. He held the marketing and supplying of generic building products for subsequent use in unspecified and unknown buildings did not involve any of the four listed activities. Accordingly, Carter Holt, when it supplied cladding sheets and cladding systems indirectly, had not done any work in constructing, altering, demolishing or removing any of the school buildings.[2]

Asher J was satisfied that these proceedings related to the qualities of the cladding itself, and not to the installation of the cladding. The deficiencies of the cladding did not relate in any direct way to the process of construction of the school buildings. Accordingly Carter Holt was not entitled to the benefit of the long stop limitation.

Conclusion

The fundamental issue to be considered when determining if a new duty of care should be recognised in New Zealand is whether, “in light of all the circumstances of the case, it is just and reasonable that such a duty be imposed”.[3] In this instance the judge saw the question of being whether it would be just and reasonable to impose a duty of care on the manufacturers and/or suppliers of defective building products. That, the judge considered, was a question to be answered at trial and not in a strike out application.

As Asher J pointed out in his judgement, councils have carried much of the burden for compensating building owners to date, reflecting a special responsibility imposed on them by the BA 2004, in spite of the fact that they have often had no direct involvement in causing of defects, but merely failed to detect them.

In Asher J’s opinion, if a duty of care is found to exist, there is a prospect that building suppliers will bear an undue and disproportionate responsibility for leaking buildings. This will be particularly so if other parties involved in the building of the schools, who may have been negligent, are shielded by the limitation provisions under the BA 2004, while building suppliers have no similar protection.

However, the economic and health risks associated with the leaky buildings are substantial and the costs and injustices that these involve will have to be weighed against the profits of businesses such as Carter Holt.

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